This past week saw reports emerge that China is considering gradually devaluing its own yuan. While the currency recently touched a three year high, this could all be about to change. Beijing is earnestly looking for a way to offset the trade tariff impact on its exports to the United States. Meanwhile the tensions and reprisals worsened throughout the last week between the two countries. This has created massive price swigs and huge volatility in global markets.
Fears of a currency and trade war have led to multiple hundred point swings in the Dow and other equities markets around the world on an increasingly frequent basis lately. Gold offers insurance and protection during market turbulence. This is one of the many reasons for why you need a gold IRA now. Gold outperforms in times of economic crisis as it has for thousands of years. Today is a good time to consider what gold goes in an IRA. It will be late to start doing this after a currency or trade war has erupted.
Yuan Devaluation Evaluated
China has been contemplating the effects of potentially depreciating their yuan currency significantly over time. This is because the national leadership is looking at all of its viable options as the continuing trade fight with American President Donald Trump and his administration escalates. U.S. and global financial markets have been the biggest victims so far.
High level Chinese government people are evaluating a two path report on yuan devaluation that their government recently prepared. The first direction considers what the impacts would be on deploying the currency as a trade negotiation tool. The second one looks into the implications of the country devaluing its currency in an effort to try to reduce the effects of trade tariffs and agreements that decrease Chinese exports to the U.S.
ING Bank NV Strategist Viraj Patel commented on the Chinese study and what it means with:
“It seems as if Beijing is showing the full extent of policies they could deploy. “
To be sure the yuan has been on the rise since Trump became president last year. It is up approximately nine percent versus the dollar in that time frame. Even with the trade tensions increasing over the past weeks the Chinese currency has held steady. Only last month, the yuan reached its highest level dating back to August of 2015. This chart below shows the performance of the yuan going back to its last currency devaluation in 2015 and through President Trump’s tenure in office:
Yuan Devaluation Involves Several Risks for the Chinese
It is possible that a weakened yuan might help export businesses in China as large scale tariffs against their goods take effect in the United States. The Chinese would be taking on a number of risk in devaluing their currency though. For one it would provide the U.S. President with the ammunition he needs to carry out his threat to see China named as a currency manipulator.
This would make it harder for the Chinese firms to keep up with their enormous piles of offshore debt. Besides this it would undo progress the national government has realized in pushing for a more market based rate of exchange. Beijing also risks a greater amount of volatility in their financial markets as a result of such an action.
The Chinese have made great efforts to keep this from happening as it did back in August of 2015. The shock two percent devaluation of the yuan at that point had massive implications for China and throughout the world. Capital flowed away from the country. Global markets reeled from the reverberating waves.
Citi Private Bank Investment Strategist Ken Peng of Hong Kong framed the consequences of such a devaluation on China’s part with:
“There are many measures they can take before resorting to this tool. Using yuan depreciation is like sacrificing 800 soldiers of your own to kill just 1,000 enemies.”
In other words, the Chinese would lose almost as much as they gained by such a dramatic currency war move.
Tariff Reprisals Between China and the U.S. Continue
The threat of a Chinese currency war comes against the backdrop of the escalating tariff dispute. This began originally as the U.S. administration attempted to address the deteriorating trade deficit that just rose to a nine and a half year high. In a first effort to come up with a level fair playing field for the U.S. in trade, the president enacted duties of 25 percent on steel and 10 percent on aluminum. It has impacted washing machines and solar panels in particular.
This past Tuesday, the administration unveiled its next wave of tariffs to cover approximately $50 billion worth of Chinese goods. It included a 25 percent tariff on 1,300 individual Chinese medical, industrial technology, robotics, machinery, aerospace, and other transportation goods. China responded on Wednesday in kind. Their $50 billion of U.S. imports to fall under a 25 percent tariff include automobiles, beef, soybeans, chemicals, and airplanes.
Thursday the Trump administration moved in response to the Chinese tariff retaliation. President Trump ordered the United States Trade Representative to figure up a list of another $100 billion in Chinese goods suitable for tariffs. Beijing did not take this threat lightly. Their Ministry of Commerce Spokesman Gao Feng promised that the country will:
“retaliate immediately, intensively, and without any hesitation” in response to another $100 billion in Chinese import goods’ tariffs. The country has already drafted up a list of American targets for retaliation to be ready for such a move.
Naturally stock markets in the U.S. and around the globe have been on a roller coaster ride over the tit for tat trade escalations especially this past week.
Effects on Markets Have Been Significant
The impacts of the U.S. and Chinese trade argument have caused dramatic knock on effects on global equities’ values. U.S. and China stock markets in particular have suffered. Since reaching its high of the year in January, the S&P 500 Index has declined by over nine percent so far. The Shanghai Composite Index has similarly seen a 12 percent drop on fears that the tariff retaliations will descend still further into an all out trade war.
Safe haven seekers have been moving their money into U.S. Treasuries as well. This has led to the multi year high in yields on the Treasuries coming down some. These effects have not yet considered the possibility of a currency war in which the Chinese devalue their yuan against the dollar.
Gold Is Your Best Proven Defense Against Market Instability and Turmoil
In times like these when trade disputes threaten to erupt into full blown trade and currency wars you need a dependable safe haven. Gold is the historically proven asset hedge that has a track record going back five thousand years. It has seen countless investors through market turbulence such as currency devaluations and trade wars.
This is the latest headline grabbing reason for why you need to invest in gold. The yellow metal offers you asset diversification in a real and tangible form that has held and improved its value over the long haul. Now is the time to start thinking about protecting your retirement accounts. You can begin by looking into how to invest in gold with a Gold IRA.